Fed Tells Big Banks Results of Stress Tests but Reveals Little to the Public

Network News

The nation's largest banks yesterday learned how much money the government projects they will lose over the next two years, the result of stress tests to determine whether they need more capital to survive those losses.

The government hopes to reassure investors that most banks are in good shape. But at least one firm was told yesterday that it must raise more capital, according to a person with direct knowledge who spoke on condition of anonymity because of the sensitivity of the information.

Banks required to raise money have several months to find private investors before they are forced to accept federal aid. Other banks may be required to improve the stability of their capital reserves by issuing common shares to preferred shareholders. In some cases, the efforts to buttress capital could force companies to sell the government a significant ownership stake.

The public, however, remained largely in the dark. The government will not publicize its evaluations until the week of May 4. The Federal Reserve yesterday disappointed many investors by declining to disclose even the standards it is using to evaluate the banks.

In the absence of clarity, financial analysts continue to release their own evaluations of which firms will need to raise capital.

Concerns focus on banks that made large numbers of loans for commercial real estate development, because of a belief that losses on those loans will rise rapidly in the coming months. Such lending is a particularly important business for regional banks including Regions Financial of Alabama, BB&T of North Carolina and Ohio's Fifth Third.

Bank of America and Citigroup, two of the nation's largest banks, also are viewed as candidates by many analysts. Both banks already have taken two rounds of federal aid, and Citigroup has received permission to convert the government's existing investment to less onerous terms.

The stress tests have become an unwieldy challenge for the Obama administration, which hoped to calm investors simply by declaring that the banks were healthy.

It has become clear, however, that calming investors will require evidence. And this has forced the government into an awkward bind: If it says too little, investors may distrust the results; if it says too much, the weakest banks could sustain an irreparable loss of public confidence.

The proper calibration remains a subject of debate within the administration, even as regulators began yesterday to discuss the results with banks.

Meetings at the Federal Reserve Bank of New York began at 8 a.m. and ran into the late afternoon. Executives from seven banks were taken in turn to conference rooms where they sat across from regulators for about an hour, listening to the Fed's findings and then discussing the results. Other regional Federal Reserve banks hosted similar meetings.

The 19 banks were given until Friday to contest the government's conclusions.